Hospitals' overlooked performance metric

Many nonprofit hospitals and health systems issue tax-exempt debt to raise capital, putting pressure on them to operate like their for-profit counterparts, most of which also issue debt to a similar pool of potential buyers, according to a Feb. 23 report published by Health Affairs.

Five things to know:

1. Credit ratings are a key performance metric that is likely to be a top priority for hospital leaders, but some nonprofit hospitals have been scrutinized recently for acting in ways associated with for-profit hospitals, according to the report. 

2. Isomorphic pressures (the forces that influence and shape organizations) related to debt market participation drive nonprofit hospitals to act in many of the same ways as for-profit hospitals, according to the report. Much of this pressure stems from the three major credit rating agencies — Moody's Investor Service, Fitch Ratings and Standard & Poor's — which analyze hospitals based on the likelihood that they will default on debt. 

3. Various key metrics are used to evaluate hospitals, including cost structures, local demographic profiles and payer mix. Nonprofit hospital executives aim to improve performance against ratings agencies' benchmarks to strengthen their organizations' credit ratings and access to capital.

4. Rating agencies rate bonds as more or less favorable based on the financial stability of the issuing hospital or health system. Increasing revenue, decreasing costs and reduced uncertainty are generally favorable factors. Examples include opening high-revenue service lines, expanding into high-income areas, reducing unnecessary staffing and limiting uncompensated care, according to the report. 

5. Hospital leaders face pressure to protect credit ratings and may engage in financial practices that conflict with health equity, such as adjusting payer mixes or preferentially recruiting patients from wealthier demographics to bolster financial viability. 

Click here for more details on the Health Affairs report.

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